At the Erez border crossing, Livni said Kassam rockets fired by Gaza-based Palestinians on western Negev communities had reached an "unbearable" level.

Since the Israeli government evacuated and subsequently destroyed 21 communities in the Gush Etzion Settlement Bloc in the Gaza Strip in August 2005, the situation has deteriorated.

"Israel pulled out of Gaza. We offered hope to the Palestinians, [but] the current situation there is one of terrorism. Hamas is getting stronger," Livni told the foreign diplomats.

Following the pullout, Israel turned over control of the Philadelphi Corridor -- a narrow strip of land separating the Gaza Strip from the Egyptian Sinai -- to Egypt.

"The international community supported our decision to pull IDF [Israel Defense Forces] troops from the Philadelphi patrol route, and Hamas has used the opportunity to build a small, but powerful army in Gaza," she said.

Livni said the situation in Gaza is negatively affecting Israeli-Palestinian negotiations.

"We will continue negotiating, but we must be realistic," Livni said. "Negotiations alone will not create a magic solution for the problems created from Gaza, certainly not in the short term. The opposite is actually true. The situation in Gaza has an impact on our ability to implement the results of these negotiations," she said.

"There are three things we will never agree to: a terror state, a radical Islamist state on our border, or a weak country doomed to failure. I believe this is in the interest of both sides," Livni told the diplomats.

The Olmert government has shied away from a large-scale incursion into the densely populated Gaza Strip because of condemnation from the international community.

But the prime minister is under increasing pressure to allow a large-scale operation by the IDF to deal with the situation in the Gaza Strip.